Archive for the ‘partnership’ Tag

Get Ready for 2015 Taxes

Originally published in the Cedar Street Times

January 8, 2015

 

We are going to take a break from our Back to Basics series to address a few timely issues.

At the beginning of every year, I send each of my clients a tax organizer to assist in gathering all the information necessary to complete the tax returns in an efficient manner.  The tax organizer is customized for the client and includes his or her prior year amounts for comparative purposes (and it serves as a great memory jogger so nothing is left out).

There is also a questionnaire to assist in alerting us to items that may not occur every year, but that may be present in the current year.  I also ask clients additional questions about the status of things like their estate planning, retirement planning, assets, debts, insurance, health care directives, etc. in order to ensure that they are thinking about these important issues each year.

Organizers are a fairly common practice among CPA firms, and for good reason.  They result in more accurate and more efficient tax preparation which should translate into a more accurate calculation of your tax liability, less problems with the taxing authorities, and less cost to you in the long-run.  Some of you may find yourselves saying, “Oh, I never use the organizer.  My CPA knows how I do things, and I have been doing it this way for years, plus my tax stuff is very simple.”

Behind the scenes this translates into moments of, “Oh, yeah, I remember these yellow sheets with the small scribbles from the past – now where did she put the real estate taxes again?”  And then if there is staff involved, there may be an additional conversation, “Okay, now here is what you need to know about how Mrs. Jones organizes her information…”    Since time is a precious commodity, the more of it that is used in the process of assisting you, the higher your bill is going to be.  With some firms, you will see this reflected in your bill each year.  In other firms, your pricing will be more consistent, but will trend higher or lower as a result over a period of years.

Ask yourself, is the firm going to be faster at learning, remembering, and extracting information from hundreds of different client systems with information in different orders, or from one system which is perfectly ordered with its software and that it knows backwards and forwards?  You can minimize the fees related to data collection and entry, and just spend your money on the real value of strategy in preparing the returns.

That said, maybe it is worth it to you to keep doing it the way you have always done it.  A CPA firm is generally going to be intelligent enough to figure it out and let you know what is unclear or what else may be missing in most cases, it just might cost you a little more, and have a little more risk associated with it.

In addition to the organizer each year, I send clients an engagement letter for services to be provided, a limited tax power of attorney to speed up the process in case we need to resolve an issue on a client’s behalf, and an additional organizer letter.  The organizer letter explains new tax developments over the past year, as well as revisiting issues from prior years that remain important and still somewhat fresh.  This year’s organizer letter was six pages long.  I don’t expect clients to necessarily read it all, but it is laid out in an easier manner to skim the topics and see what might be important to read further.

Here is a high level summary of some of the issues from my organizer letter you may want to be aware of:

  1. The IRS took a clear position this year that businesses sending 1099 forms this January must send them to LLCs as well, unless the LLCs have made a special election to be taxed as a corporation.  Fees for not properly sending 1099s have doubled.
  2. President Obama signed a new law this year that requires anyone claiming education credits or education deductions to have a 1098-T when filing their tax returns.
  3. The PATH Act (Protecting Americans from Tax Hikes) was signed into law on December 18, 2015.  This was the extender bill for this year which we have grown accustomed to getting at the last minute each year from Congress.  Some notable provisions made permanent include the sales tax deduction as an option in lieu of state income taxes, the IRA‐to‐charity exclusion, enhanced child tax credit, enhanced American opportunity tax credit, enhanced earned income tax credit, above‐the‐line deductions for qualified tuition expenses, the section 179 depreciation deduction for up to $500,000, built‐in‐gains holding period of 5 years for s‐corporations, and enhanced exclusion of gain on sale of small business stock. The qualified tuition deduction, mortgage insurance premiums deductible as interest, and exclusion of income for debt on discharged principal residences where extended through 2016. Bonus depreciation and first‐year bonus depreciation on automobiles was extended through 2019.
  4. Do not do more than one indirect rollover from one retirement plan to another in any 365 day period (not calendar year based), or you will face penalties.  Indirect rollovers are where the retirement plan custodian issues you a check directly, and then you have 60 days to deposit the money with another retirement plan custodian or consider it a distribution.  (You can still do unlimited direct rollovers from one trustee to another.)
  5. Several tax return due dates are changing affecting 2016 returns (not 2015 returns) – due dates for partnerships move to March 15, c-corporations move to April 15, and FinCen 114 for foreign bank accounts move to April 15 and are now eligible for a six month extension.
  6. The new capitalization and repair regulations of 2014 were modified to allow taxpayers to have a capitalization policy of $2,500.  This means businesses can now deduct any item $2,500 or less as an expense without having to include it on a depreciation schedule or take a section 179 deduction for it.  You do not even have to have a written policy to this effect, but you do have to make an annual 1.263(a)-1(f) election on your returns each year to do this.
  7. Watch for 1095-A, B, and/or Cs this year as they will be much more prevalent and will be needed in the preparation of your tax returns to ensure you meet the health care insurance requirement.  Last year was lax.  This year the noose has been tightened.  If you did not have health insurance for all or part of the year, be aware, some exemptions from the health insurance mandate require you to apply to Covered California to get an exemption for use in your preparation.  In other words – get moving!

Prior articles are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041.

Forming a Business Entity

Originally published in the Cedar Street Times

September 19, 2014

Over the years, I have had many appointments with new and existing clients that are starting a small business for the first time.  We usually spend about an hour or so going through the basics of what to expect and be aware of: we cover things like self-employment taxes, tax estimates, business property tax statements, employees, insurance, sales tax, fictitious business name registration, business bank accounts, EINs, business licenses, etc.  One of the first things we talk about, however, is entity selection.  In other words, are you going to operate as a sole proprietorship, or will you form an LLC, S-corporation, C-corporation, partnership, etc.

Unfortunately, there are many people out there who pull the trigger early on entity selection based on something they hear from friends or find on the internet prior to getting tailored professional advice.  My feeling is that you really want to have a discussion about your particular situation with your accountant to provide input on the tax and accounting related issues and a business attorney to weigh in on liability, and other legal related issues before you get started.  The attorney should form the entity if you choose to operate other than as a sole proprietorship.

There are too many pitfalls, and I know there are many people out there that have made the wrong choice or, even worse, are operating with a presumption of liability protection when they have none because they did not properly form or respect the formalities of the entity.  Opposing counsel could have a victory on their hands if you failed to prepare annual corporate minutes, for instance. “Piercing the corporate veil” could suddenly enter your lexicon.

Online companies attempt to make it cheap and quick to form an entity for you, but I can tell you from my experience that many of the entities formed this way are later corrected or scrapped and redone by an attorney if one is hired to review it.  One of the problems, is that you have to be an attorney to render legal advice, and since it is rare for online companies to have attorneys for you to discuss your situation with, you may not choose the best entity or get all the language in your formation documents that you need.

Online companies also have difficulty conveying in an effective manner the important things to keep up with and staying in touch regarding these issues.  Many of the people who have used online services show up in my office with a fat binder that was shipped to them in the mail of which they have very little understanding; often has blanks that were never filled out; and has been collecting dust on the shelf.

I also hear from a fair number of these people that get notices from California requesting tax returns and a bunch of money for entities the taxpayer stopped operating years ago or maybe never even started aside from setting up the entity.  Unfortunately no one was there to advise them on how to properly close the entity.  The taxpayer often thinks that if they stop operating or decide not to go ahead with the business that they are done.  It doesn’t work this way.  I have even had people that formed an entity online and were shocked that they would have an $800 minimum fee to California each year.

There is a general push from many directions for people to establish entities for their small businesses these days.  In two weeks we will discuss the merits (or not) of this presumption.

Prior articles are republished on my website at www.tlongcpa.com/blog.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Can’t Finish Returns by October 15 Deadline?

Originally published in the Cedar Street Times

October 5, 2012

If you placed your 2011 personal tax returns on extension, you have 10 days left to complete the returns and get them filed.  This is especially important if you did not withhold enough tax or make enough estimated tax payments during the year to cover your tax liability that was technically due on April 17.  Penalties are assessed based on the unpaid balance of tax that was due on that date.  There are several penalties assessed, but the hefty penalty is the late filing penalty which equates to five percent of your unpaid tax as of April 17 for each month or part of a month the return is late (capped at 25 percent).

In the past, I have had problematic situations where a client did not receive tax documents until after October 15.  This is sometimes seen when a client is invested in a partnership or has an interest in an S-Corporation or LLC and that entity is filing their returns late – causing all the others to be late as well.  There are even situations when other entities are filing timely and it can cause you to be late.  An example of this would be if you were a beneficiary of an irrevocable trust.  These types of trusts generally have the same due dates that your personal returns do – April 15, with a six month extension to October 15.  What if the trust is completed at the end of the day on October 15?  Will the beneficiary be able to get their K-1 tax document and provide to their accountant to finish before midnight!!  Maybe not!

So what do you do if you still cannot file by October 15?  Is there any hope?  There are some specific exceptions for military service members and taxpayers working abroad, but if you do not qualify for those exceptions, what then?  One option would be to wait until the information is received and then file the return requesting penalty relief for reasonable cause.  This is a tough row to hoe in actuality, because the IRS places a high degree of responsibility on the taxpayer:  I can almost guarantee you that what you feel is reasonable will not be the same as what the IRS feels is reasonable!  You will be categorized as delinquent from the outset, and then you will start on the defensive.

A better solution in many cases would be to go ahead and file a tax return with the information available and your best estimate of any missing information.  (There are provisions in the code that allow for estimates under certain circumstances.)  A statement should be included with the return explaining the situation and the efforts made to obtain the information.  You should also state the intent to amend the return if materially different from the actual information when it is available.  This would prevent a late filing penalty from being assessed, and you would be categorized as timely filed unless the return is challenged by audit.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.